Expenses from 2016 on 2017 return

7 Replies

Hi, 

I realize that I need to speak to a CPA but I am trying to figure out as much as possible before I do so. Any help is appreciated.  

In 2016 I started a single member LLC. I purchased a property in June but it wasn't rented out until 2017. My CPA who did my taxes last year said that all expenses should be capitalized in 2017 once the house is rented. My understanding of this was limited at the time (and I am still learning) so I just went with whatever he said. My understanding is that he is correct on this matter.

I have been going through last years return trying to understand it and I realize that there was no return at all filed for any business activity. I had expenses that I do not believe should be capitalized with that property such as mileage, shipping costs, purchases of tools, meals. There were two inspections on houses that I did not end up purchasing in addition to a lost 500$ EMD deposit that HUD wouldn't return. There were also legal fees associated with starting the business.

The total for tools was around 1000$.  They are all small tools that I believe can be expensed.  There are also utilities and insurance which I believe fall into the total that will be depreciated over 27.5 years on the house. 

My question is, since these expenses were in 2016, but no return was filed for business activity, can they be expensed in 2017?  If not will they have to be included in the depreciation schedule of the house?  Did my CPA mess up by not doing this last year?  

I want to do everything correctly and make sure I can take the max amount of deductions I am entitled to so I want to learn exactly how this works because after 2 houses I've learned that there are many professionals out there who are either lazy or do not know any better.  

Thanks in advance. 

Mike C

@Michael Chavarria

Creating an LLC does not allow you to expense items earlier than if you didn't create a business entity.

It does not appear from your story that you had a business in 2016.

Expenses/costs spent in 2016 will fall into one of 2 categories. 
1) Added to the cost of business and depreciated over the useful life
2) Start up cost - you can potentially write off $5,000 in the first year of activity with the remaining balance being amortized.

Legal fees associated with starting a business, LLC costs are some items that you can potentially expense in 2017.

Thanks,

So the LLC is not operational for tax purposes even though I created it, opened a bank account and purchased a property in it's name? It become operational in 2017 when it was made available for rent?

and you are saying that the tools and mileage expense can be accounted for as startup expenses?

Originally posted by @Michael Chavarria :

Thanks,

So the LLC is not operational for tax purposes even though I created it, opened a bank account and purchased a property in it's name? It become operational in 2017 when it was made available for rent?

and you are saying that the tools and mileage expense can be accounted for as startup expenses?

Are you saying all the expense were not taken because your CPA forgot to account or those or he capitalized everything?

You can amend the return and take a proper deductions. 

  • The cost (Milage, meals, tools .....)  that you incurred after acquiring the property in 2016 can be expensed. 
  • The general costs before you acquired the property potentially be expensed as Startup expense as mentioned above. 
  • The property-specific cost know as " inherently facilitative cost" have to be capitalized. 
  • Legal cost can be expensed if below 5000 as organizational fees. 

thank you to everyone for the responses.  

I believe the CPA forgot or most likely was not thorough.    I’ve always felt like he did not ask detailed questions like my previous CPA who unfortunately passed away.  

I’m going to use of a combination of capitalizing and startup costs and just leave out the mileage and a few other odds and ends and treat it as a lesson learned.  

@Michael Chavarria

Don't rush to blame your CPA. I'm afraid you did not understand what @Basit Siddiqi explained, and possibly were confused by what @Ashish Acharya added, which could have been (mis)interpreted as a green light to deduct.

A business cannot start deducting anything - not start-up costs and not anything else - until it has legally started for tax purposes. Most businesses can be considered started when they begin advertising or other activities intended to bring money in.

However, holding rental properties is a very unique business in this regard. It is not considered started until you have at least one property "ready and available" for rent. Even though you're doing stuff and spending money - you're not technically "in business" yet. Once your first property is rehabbed and ready for tenants - only then do you have your business started. And at that point you can deduct certain things that my colleagues listed: start-up costs, organizational costs, and various other costs. You can also start depreciating property-specific costs that have been rolled (capitalized) into the property.

Seems like in your case your business did not start until 2017, so your 2016 return correctly showed nothing. As long as your CPA kept track of those expenses and plans to use them for 2017 - you're in good shape.

LLC does not change anything as far as these rules are considered.

Last important point: the start date is "ready and available" as opposed to "actually rented."

Ok, great.  That helps a lot! Thank you! 

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